Robinhood Faces First Of Many State Challenges

Robinhood is facing its first challenge since its decision to partner with prediction market site Kalshi to offer March Madness event contracts on its platform. The Massachusetts State Secretary, Bill Galvin, announced his office had subpoenaed the company for information about the number of users from Massachusetts who traded in college sports contracts.

Speaking exclusively to Reuters, Galvin stated that Robinhood was "linking a gambling event on a popular sports event that's especially popular to young people to a brokerage account," adding that this new offering was a gimmick and that Robinhood was "very good at gimmicks to lure investors away from sound investing."

Sports Gambling vs States' Rights

Look, the second this decision was announced by Robinhood, anyone in the industry could have predicted that challenges would come.

As a federally regulated company, Robinhood bypasses state-level sports gambling laws and regulations. Sports gambling was finally legal thanks to the Supreme Court declaring the Professional and Amateur Sports Protection Act (PASPA) of 1992 unconstitutional.

Part of the Supreme Court's decision was that PASPA "commandeered power from the states". By striking down the 26-year-old law, the nation's top court allowed states to decide if sports gambling was allowed within their borders.

Having Robinhood to circumvent that decision by the Supreme Court was a slap in the face to states that have taken the time to draft legislation to regulate these sportsbooks, regulation that pulls in millions of tax revenues for said states that go towards education, as well as combating the negative externalities from the gambling industry, such as addiction.

States weren't going to let that stand. Massachusetts is but the first to subpoena Robinhood. I expect more to follow in their footsteps, specifically states like New York, which has some of the toughest regulations on sports gambling and the highest tax rate on gambling revenues at 51%.

Size Matters

We have to remember that Robinhood is not a small company. Their nearly 26 million users are nearly triple the combined user base of FanDuel (4.5 million users) and DraftKings (4.8 million), the two largest sportsbooks in the US.

In 2024, sports gambling revenues topped $13 billion. FanDuel and DraftKings account for 81% of that revenue ($10.55 billion), which produced $2.1 billion in taxable revenue for the states.

States are losing out on a lot of tax revenues from Robinhood, so again, expect these challenges to keep on coming.